MNI: Big Price Cuts Needed To Lure China Homebuyers-Advisors

Sluggish consumer demand will slow the uptake of China’s mid-May housing rescue plan, advisors told MNI, noting authorities need to lower home purchase costs substantially to stimulate demand.

“Local governments and banks are not offering enough incentives to motivate homebuyers,” said Song Ding, a researcher at China Development Institute, arguing that current policies are still relatively conservative, despite the State Council’s June call for more progressive actions. (See MNI EM: China To Maintain Housing Stimulus, Lift Loan Appetite)

New home prices in 70 major cities have fallen for 12 consecutive months and recorded a further 0.7% m/m drop in May, the steepest decline since October 2014.

While home sales in square metres fell 20.3% y/y in the first five months, the area for sale grew 15.8% y/y to over 740 million sqm, higher than 2016 when Beijing introduced its shantytown redevelopment scheme and rapidly reduced 250 million sqm of inventory.

However, unlike in 2016 when the housing market was on the rise, Song noted that this round of destocking will require banks to make profit concessions to lure more buyers, which is also in line with policymakers’ intention of “de-financialisation.”

Room exists to lower new and outstanding mortgage rates, and banks should help ease repayment pressure by reducing the proportion of interest payments each month and extending loans, instead of trying to prevent early repayment, Song said. Repayment should start after housing delivery, he argued.

HIGH RATES

Housing mortgage rates, which remain above 3%, are still relatively high compared to the risk-free interest rate, said Li Yujia, chief research fellow at the Guangdong Urban & Rural Planning and Design Institute. The 10-year treasury bond yield has fallen below 2.3% this week.

Li noted recent mortgage rates for first-time buyers dropped by only about 30 basis points after the People’s Bank of China on May 17 scrapped the policy floor of mortgage rates nationwide while also cutting the minimum down-payment ratio to 15% for first-time buyers and 25% for second homes from the previous 20% and 30%.

Song said cutting downpayments lowers homebuying thresholds in the short term but increases the loan repayment burden in the long run, which may seem unattractive to homebuyers with weakened income expectations.

While time and reform are needed to restore confidence, Song expects a Federal Reserve move to lower its interest rates in H2 may offer some immediate support to stabilise the real-estate sector. “Chinese housing policies which have continuously relaxed since 2022 face diminishing marginal benefits,” said Song. “Now we may need some patience to wait for changes in the external environment.”

LOCAL ACQUISITION

Beijing also expanded its call for local authorities to buy completed-but-unsold stock for affordable housing to county-level cities last week, but advisors noted implementation could take time. (See MNI EM: Beijing Called On To Buy Housing Stock Over Local Govs)

This round of destocking should see a reduction of at least 200 million sqm to shorten the cycle to 15 months from the current 25-month average, Song said, while local state-owned enterprises could help to absorb ideally up to one-third of inventory.

However, local SOEs may not be willing to purchase if prices do not fall low enough to cover costs, Song said, adding developers will also not want to sell at too much loss.

Li noted affordable housing is typically sold at a 50% discount to commercial housing in the same area, meaning acquisition prices will be even lower.

Uncertainty remains over how many projects can fit into the 70-90 sqm affordable-housing requirement and achieve financial balance between buyers and developers, Li added